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Sony and Gaikai Will Stomp All Over AT&T's Video Game Service

AT&T (NYSE: T), Verizon (NYSE: VZ), and Time Warner Cable (NYSE: TWC) are exploring the possibility of delivering high-end video games to their subscribers. It is a move that is being viewed as a threat to a home gaming empire that is currently owned by Sony (NYSE: SNE), Microsoft (NYSE: MSFT), and Nintendo (OTC: NTDOY).

The concept sounds very intriguing. According to Bloomberg, the aforementioned cable providers want to offer higher-quality games than those provided by Zynga (NASDAQ: ZNGA) and other social game developers.

If successful, this venture could create an entirely new generation of games and services that were not previously available. That would be huge. Instead of merely competing with Sony and Microsoft by providing a new venue for existing games, consumers would now gain access to entirely new games.

Unfortunately, that is the best-case scenario. While mainstream reporters are painting this picture as the potential end for console gaming, the reality is that these cable providers may have little chance of being successful.

For starters, they are said to be using broadband Internet connections to deliver these games to consumers. This is problematic for a number of reasons. OnLive -- and its various online-only predecessors -- proved that the world is not yet ready to stream high-end games. The technology is too young, too weak, and too inefficient. There is no way that consumers -- least of all gamers -- will accept the idea that their gaming experience must depend on a consistent Internet connection.

While Playcast, CiiNOW, and other streaming companies have repeatedly claimed that they are just as fast as consoles, OnLive and other services said the same. They might work great in beta, but when rolled out to millions of consumers worldwide, they have always failed.

Cable providers must also deal with licensing. No one wants to pay $10 per month to play old games over the Internet, but that is what most streaming services offer. It is very difficult to get game developers to stream their biggest and newest releases when they can make millions more selling them in stores. Even digital downloads provide a better sales opportunity.

Thus, even if AT&T had the technology to stream the next Call of Duty, it is unlikely that it would be able to afford the license. Activision (NASDAQ: ATVI), which owns and produces the Call of Duty franchise, makes more than a billion annually selling boxed copies of the game in store. It could afford to charge cable providers whatever it wants to stream the game online.

High licensing fees would either diminish the profits or force AT&T to charge a higher monthly fee. Moviegoers freaked out when Netflix (NASDAQ: NFLX) raised the price of its streaming/DVD combo from $10 to $16 per month. How do you think gamers will react when they learn how much they have to pay to stream games they could have purchased in store for a flat rate?

AT&T could get creative. It could purchase a few development studios and start building games itself. Unfortunately, that venture might prove to be a total disaster. From its inception, AT&T has not created a single form of valuable entertainment. The same can be said for all of the cable providers. Comcast (NASDAQ: CMCSA) is so devoid of creativity that it had to purchase NBC -- the least successful of all the major TV networks -- just to offer something different.

Sony and Nintendo, however, are primarily in the business of producing entertainment. Microsoft started as a software company, but it is slowly becoming an entertainment powerhouse.

Earlier this year, Sony purchased the Netflix of gaming, Gaikai, for almost $400 million. In other words, a company that lives and breathes entertainment will soon stream games directly to consumers. Cable providers may not be able to compete with that.

In theory, AT&T does not have to create entertainment. It is not a studio or a publisher -- it is a cable provider and a telecommunications company. It aims to provide consumers with a way to be entertained, but has no interest in actually producing entertainment. That is fine. Every company has its role.

However, it is that very role that ensures AT&T will fail. By relying on others, AT&T will be at the mercy of game developers and publishers who are as weary of streaming as they are clueless about which platforms to support.

This is an industry in turmoil. It may very well be an industry in transformation. And while the future may continue to involve a mix of console and mobile/handheld gaming until something different comes along, cable boxes are unlikely to be at the center of the industry's next evolution. At this rate, they will be lucky just to play a role.